By Shuli Ren

During the Q2 earnings call yesterday, Chinese map services provider AutoNavi Holdings (AMAP) announced a major change to its business model: it would now offer its premium navigation map for free.

This announcement overlapped with weak, though expected, second-quarter financials. AutoNavi reported $38 million revenue, a 5% decline from a year ago, and $6.6 million non-GAAP net income, a 49% fall from last year.

Investors raised eyebrows: Can AutoNavi ever monetize mapping services at all when Baidu is offering it for free? AutoNavi’s shares dropped 14.4% yesterday, the largest one-day slide since its 2010 IPO.

Don’t panic.

AutoNavi is land grabbing the nascent mobile market right now. Once it reaches a critical user base, it can make money from location-based services (LBS).

Nomura Securities analysts Leping Huang and David Hao write:

We agree with management’s view that license-based offline maps will eventually shift to free online maps, driven by improvement in network quality and the rise of Internet-based map service providers, eg, Baidu.

More importantly, AutoNavi has a powerful partner – China’s largest e-commerce Alibaba. Alibaba invested $294 million in AutoNavi in May for a 28% stake. Here is Normura again:

Alibaba’s investment in May 2013 gives AMAP management a solid cash reserve to sit on (USD517mn in 2H13, equivalent to 6.4x of FY12 opex) in order to explore a new business model. Meanwhile, this strategy is also in line with one of AMAP’s aims to become the mobile Internet gateway to Alibaba’s vast e-commerce platform and services.

Note the cash reserve is 6.5 times 2012 operating expense – this means AutoNavi can burn cash for at least a couple of years.

Alibaba can also share its merchant database with AutoNavi, to speed up the monetizing process.

Nomura lowered its target price from $18 to $17 to reflect AutoNavi’s new strategy of short-term pain for long-term gain, but maintained a Buy rating.

For those of you who read Chinese, this is an interesting article from Qihoo (QIHU)’s CEO, who sits on AutoNavi’s board, applauding AutoNavi’s decision to keep its maps free. Qihoo competes with Baidu in search. You can feel the team spirit!

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.